Nolan Watson - CEO of Sandstorm Gold Royalties (SAND)

Participants

Nolan Watson, CEO of Sandstorm Gold Royalties (SAND)

Nate Abercrombie, The Stock Podcast

Interview Transcript

Nate:     Nolan Watson, thank you so much for joining the podcast.

Nolan:   Well, thank you. I appreciate it.

Nate:     Well, I appreciate you coming on, and I’m really excited to talk about your company. But before we get to your company, could you provide listeners with just a little bit of your background?

Nolan:   Yeah, my background, born and raised here in Canada, and went through business school out of the University of British Columbia. Graduated with honors with a B-Com there, and then decided right away it would be a good idea to go in and do an accounting designation, and I went through my CPA program, finished first out of 1,000 people in Western Canada on a 13-hour final exam. Got a gold medal in accounting, and then decided I hated accounting, so I quit and went into finance.

Nolan:   And did a CFA, and then I’ve been in the mining industry basically my entire career, even right out of university when I was already declaring to be a CPA. I was a mining guy in the firm, and traveling the world and auditing and visiting mines, and as soon as I moved on from that job, got hired on by a company called Goldcorp, which was at one point in time, the world’s second largest gold mining company in the world. And they just got bought out, actually, a couple of months ago here, and are now part of the world’s largest gold mining company.

Nolan:   And so I worked with them for a couple of years, and then moved into a company called Silver Wheaton, which is now called Wheaton Precious Metals. I was their first employee. We grew that to about a $5 billion market capitalization. I was their Chief Financial Officer, and actually in that process, still hold the world record today for being the youngest Chief Financial Officer of any multi-billion dollar New York Stock Exchange listed company in the world.

Nolan:   And then I decided to go be an entrepreneur, and I left that job and went and started up Sandstorm, and have been running Sandstorm as President and CEO for over nine years, and have grown it up to a billion dollar market cap, and continuing to grow. It’s been a lot of fun.

Nate:     How old were you whenever you were the CFO?

Nolan:   I was 26 years old, and to put it in perspective, you don’t qualify to be a CPA until you’re 25. So I had been … Professionally received my designation and had it for an entire year before I became CFO of a multi-billion dollar company. It was pretty daunting. It was a pretty good job of pretending like I knew what I was doing.

Nate:     Could you talk just a little bit more about Sandstorm, about the history and the business model?

Nolan:   Yeah, so the business model’s one that’s been around for a while. Kind of the first company that brought in streaming in the world was a company called Silver Wheaton, which is the company I was CFO of, and they focused primarily on what you’d call silver streaming.

Nolan:   So, you’d go to either a silver mine or a base metal mine, say maybe a lead/zinc mine that is producing silver as a by-product, and you would say, “We’ll give you money today, up front, and you can use that money to build your mine, or you could use it to buy another mine, or you could use it to pay down debt. Use the money for whatever you want. And we’ll give it to you today, and what we want in return is a contract that allows us to purchase a certain percentage of the silver you’re going to produce, for the entire life of the mine. And we’re going to buy it at a fixed, artificially low number.”

Nolan:   So back then, silver was trading below $10 an ounce, and so we said, “We’ll buy your silver at $4 an ounce, and we’ll sell it at whatever the market price is. And we know the price of silver’s going to be more than $4 an ounce, and so do you, and that’s the reason we’re making this upfront payment to you. This upfront payment is the present value of your expected future profits from that silver stream you’re taking.”

Nolan:   And we went around and we did a number of those deals with mines around the world, and all of a sudden, what we had effectively created was a silver mining company that had profit payoff like a silver mining company. If silver prices went up, we made more money, if silver prices went down, we made less money. If there was exploration upside at the mines, we made more money.

Nolan:   But what we found very quickly is that we had two key benefits that a lot of the silver mining and other mining companies in the world didn’t have. The first is that we had fixed our exposure in terms of what the operating costs were, meaning we were buying at $4 an ounce, and we knew it was going to be $4 an ounce. Whereas, most mining companies in the world are absolutely notorious at overrunning at what their expected costs are.

Nolan:   So gold companies, for example, are notorious at saying, “It’s going to cost me $800 an ounce to produce gold,” and when they actually turn the mine on, it costs them $1,200 an ounce to produce gold. Then all of a sudden they’re not making any money, and everyone who invested in that gold company loses money when the share price drops precipitously. And so we had effectively taken that risk out of the business.

Nolan:   And then the second key difference is that we were able to diversify much more quickly. And so, generalist investors around the world started realizing hey, if you want to invest in a mining company, specifically at the time when I was at Silver Wheaton, if you want to invest in a silver company, you definitely want to do it into this silver streaming company, because they’re more diversified than a normal mining company and they don’t have the risk of cost overruns.

Nolan:   And so it was the type of business model that had a lot of appeal, and so the reason I left to start up Sandstorm was to create a company from scratch, from ground zero, that did that focused on gold. And so, Sandstorm is effectively a company that just does gold streaming, and we also buy gold royalties.

Nolan:   So, the difference between a stream and a royalty is, in a stream there’s that ongoing payment per ounce that’s fixed. So in gold, it’s usually around a $400 or $500 an ounce for us, whereas a royalty, you’re just getting the ounce for free, and/or they’re just giving you an amount of cash as they mine their mine, that’s equal to your percentage of their revenue that you’re entitled to.

Nolan:   So, for example, if you’re entitled to 2% of the revenue, at the end of every quarter they’ll figure out what the revenue was at the mine, and they’ll just cut you a check for 2% of it.

Nolan:   And so that’s what we do at Sandstorm now. We’ve built up a company with 189 streams and royalties around the world. We’ve got cash flow coming in from all corners of the earth, and we’re continuing to grow and diversify the business.

Nate:     Because you had that experience with silver, why did you choose gold?

Nolan:   Well, we’d gotten to a point in the business, at Silver Wheaton, where we had either done a deal with, or been told no by the company, for virtually every major source of silver production in the entire world. And so we’re sitting there going, “Well, there aren’t a lot of silver streams out there left to do deals on.” And I’m a fairly impatient person, and wanted to grow into a bigger space. And so I left, started up in gold, and have been growing it ever since.

Nate:     Yeah. And so do you have exposure to more commodities than … Or precious metals than just gold?

Nolan:   So, Sandstorm today is about 80% precious metals. The vast majority of that is gold. We do have a little bit of silver. And then we’ve got about 20% of our revenue comes from streams or royalties from base metal projects. The majority of that other 20% is copper from a couple copper mines around the world.

Nate:     I see. And what about location? Where are your different streams and royalties located?

Nolan:   Yeah, that’s one of the great benefits of a business model like this. You get to diversify very quickly. So we are all over the world. We’ve got a significant number of our assets in Canada, the United States, from Mexico, Brazil, Argentina. We’re in West Africa, South Africa, Turkey, Australia, Europe, and we’re continuing to look even in Asia. We’re looking all across the world.

Nolan:   In fact, if you look not only at the deals we’ve already done and the streams and royalties that we own, but also the things that we’re looking at acquiring actively, you’ll just see that it’s kind of spread out amongst the whole world. And that’s an important aspect of our businesses. Because I’m a firm believer that any political party, or any ruling government in any country can go crazy for short periods of time, and the best way to defend against that is just to be spread out amongst the whole world.

Nolan:   Now, if you’re a mining company it’s hard to do that, because you’ve got to spend a lot of time, effort and emotional energy trying to manage the politics of the country that you’re in, because you have to be on the ground every day, managing that situation. And so you only want to be in a few jurisdictions, because you just, you don’t have the ability to manage the politics as the management team, of more than a few countries.

Nolan:   Whereas at Sandstorm, because we’re a royalty company, we’re literally just collecting checks from these countries, that we can be diversified across the entire world, and we really don’t have to spend a lot of time thinking about it, other than on the day we make the initial investment decision.

Nate:     And for somebody who knows nothing about royalties and streaming royalties, could you walk me through sort of just the process from conception, so let’s just say that you’re interested in a development project in some country, that you’re maybe not familiar with the political and financial regime. Walk me through just the process of how you grow your portfolio and roll a new asset into the portfolio from idea, or whether or not it’s somebody that you know in the business who told you about this really great new asset, and then how you move down the road and ultimately acquire that asset.

Nolan:   Yeah, so at Sandstorm we’ve got a large corporate development team. And although there still are thousands of development stage mines around the world, we have looked at probably the majority of those development assets between someone on our team. So it’s very rare that someone comes to us and says, “Hey, there’s this cool new mine,” and we’ve never heard about it. Almost certainly someone on our team knows about it.

Nolan:   But when someone does come to us and says, “Hey, we’re about to go build a mine. We need, pick a number, $200 million, and we’re going to go raise some equity to do that. We’re going to take on some project … Some equipment financing, so we’ll do equipment financing for all of our trucks and mobile equipment, and we need some other, either debt or a stream financing for $150 million. And once we do all that financing, we’ll have enough money, we’ll go build out mine.”

Nolan:   So we’ll start talking to them about things, about preliminary looks at their technical data. So we’ll look at some of their drilling data at a sort of superficial level, look at some of their engineering data at a superficial level, and we’ll just say, just based solely on a high level review, if the data holds up when we do further due diligence later, which we are going to do, then these are the types of terms we’d be prepared to give you.

Nolan:   So if we’re going to give you $100 million, we want X percent of your gold production for the life of your mine, and we’ll pay you, pick a number, $500 an ounce. And so we’ll deal with them at a business level. And if they go, “You know what? Actually, that deal sounds good for us. We like the broad terms.” It’s one of the reasons they would do instead of borrowing is that we’re a lot more flexible and reasonable and understanding.